TRC is ramping up the ground work for MRT3 tender submission come end Aug-22. We believe based on financial capacity, the smallest civil turnkey package (RM3-4bn) would be the focus of bidding. We consider TRC to be a key beneficiary considering its: (i) high Bumi ownership, (ii) extensive track record in mega railway projects spanning stations, viaducts and depots and (iii) healthy balance sheet (net cash). TRC is aiming to deliver its Perla@Ara Sentral (GDV: RM304m) in 4QCY22 with construction virtually completed; takeup rate is healthy at >80%. Going forward, we are forecasting lacklustre FY22 and FY23 earnings before picking up by 31.8% YoY in FY24. This will be primarily be driven by contract wins from the upcoming MRT3 project. Maintain forecasts and BUY rating with unchanged TP: RM0.40. Stock trades at -21% discount to NCPS of 38 sen.

We Met With Management Recently With the Following Key Takeaways:

Construction. Management is ramping up on tender preparations for the MRT3 which would include critical laying down of financing lines to bid for the civil packages. We believe based on the company’s financial capacity, the smallest civil turnkey package (RM3-4bn) would be the focus of bidding. We consider TRC to be a key beneficiary considering its: (i) high Bumi ownership, (ii) extensive track record in mega railway projects spanning stations, viaducts and depots and (iii) healthy balance sheet (net cash). To note, in the past TRC secured bumper contracts worth RM1.32bn and RM846.5m from MRT Putrajaya and MRT Kajang lines respectively. TRC’s unbilled orderbook currently stands at an estimated 1.7x cover, a thin cover ratio brought about by weak jobs flows in the past two years. Hence, the MRT3 is a critical job for the company either through turnkey or subsequent subcontracts. As for potential margin pressure, most of its existing jobs are in the later stage of construction which mitigates such an impact. The recent rolling over of steel prices and various commodities could provide some relief to this extent. A more material impact on execution would be labour shortage considering recent hiccups on intake from Bangladesh and Indonesia.

Property. TRC is aiming to deliver its Perla@Ara Sentral (GDV: RM304m) in 4QCY22 with construction virtually completed. We gather that it has garnered a strong overall take up of 83% (including affordable units) and should boost earnings later this year. The project represents Phase 1 of its Ara Sentral venture which collectively amount to GDV of RM1.1bn. The remaining phases are: (i) Phase 2 - F&B retail with serviced apartments, (ii) Phase 3 - office tower and Phase 4 - hotel. According to management, TRC intends to progress onto Phase 2 of Ara Sentral next year which would unlock further earnings stream from the development going forward. Meanwhile, its PPAM Dalur project (GDV: RM116m), is on track for CCC by mid-FY23, whereby the GoM underwrites entire unsold units.

Lacklustre before picking up. Going forward, we are forecasting lacklustre FY22 and FY23 earnings before picking up by 31.8% YoY in FY24. This will be primarily driven by contract wins from the upcoming MRT3 project. We have factored in construction contract wins of RM800m in FY22 as well as RM500m in both FY23 and FY24. Nonetheless, billings recognition will only pick up meaningfully starting 2024 due to the “S-curve”. All in for the period FY22f-24f our forecast suggests profit CAGR of 5.9%.

Forecasts. Maintained.

Maintain BUY; TP; RM0.40. Maintain BUY rating and SOP-driven TP of RM0.40 based on 50% discount. At our TP, TRC trades at a FY22f/23f/24f P/E multiple of 10.2x/10.3x/7.8x. We believe attaching a 50% discount (vs 20-30% for larger peers) is warranted considering its smaller size and weak replenishment in the last 2 years. While our earnings forecasts suggest lacklustre financial performance in the near term, at current price trading below its net cash we deem TRC to be undervalued as we see the company as a key Bumi beneficiary of MRT3. Key upside risks: MRT3 contract wins, lower cost pressure; Downside risks: substantial project delays, higher costs pressure, labour shortage, politics and sluggish tourism recovery.

Source: Hong Leong Investment Bank Research - 20 Jul 2022